“On Prima Facie the job of central
banker is a lot similar to a doctor, the only problem is central banker has to
prescribe the medicine well before any sign of illness” – Anonyms
Providing
a clear roadmap of likely monetary policy actions is a key challenge for the
global central banks. Major central banks, including US FED, have been
proactive to provide forward guidance and share the underlying basis for their
policy actions. The prime objective of such moves is to reduce the surprise factor
in central banking, which helps to curb wild financial market movements.
Though, the timing of US interest rate hike is debatable, but there is no doubt
that financial markets were fully prepared for the move. The volatility in
financial markets remained broadly unchanged when US FED hiked the interest rate
first time in over a decade.
Though,
it is difficult to predict the timing and quantum of monetary policy actions,
but the direction of the move can be predicted with reasonable certainty. For example
the next policy action by Reserve Bank of India, People Bank of China, Bank of
Japan and European Central Bank will be towards monetary easing. On the other
hand, the policy action by US FED will be towards monetary tightening. Bank of
England can-not be classified with same certainty as BoE officials have been
all over the place over likely policy action. BoE Governor, Mark Carny has been
vocal about interest rate hike for last 15 months. Interestingly, Carney does
not face any trouble while shifting his stance frequently, much to displeasure
of the traders Carney’s continuous shifting of stance has little correlation with
underlying economic numbers. UK’s consumer inflation, which had been roaming in
negative territory, has remained below 0.3%. The sustained low inflation can be
attributed to slump in crude oil prices and weak wage growth, which if achieved
responsible for secondary inflation in economy. The industrial activity in UK
is also remained more or less in negative territory indicating that economy has
long way to go before any possible interest rate hike.
Clueless
Cable:
A
close look at weekly movement of GBP/USD pair underlines the failure of Bank of
England’s forward guidance and communication. After UK’s election, GBP/USD pair
rallied more than 1600 pips on the expectation of interest rate hike, which
expectation was fuelled by hawkish comments from BoE officials. BoE even
claimed that it will second major central bank to hike the interest rates after
US FED. BoE’s CPI projections have been all over the place, to put things into
perspective actual inflation in December 2015 at 0.2%, is 90% less than its forecast
of 1.9%. Though, ultra-low crude oil prices are key factor but wage growth has
also remained subdued. It is noteworthy that BoE’s chief economist Mr. Andy
Haldane has argued about possibility of interest rate cut to combat inflation.
Over
the last one month, GBP/USD pair has corrected more than 1000 pips owing fading
expectation of interest rate hike. The sharp decline in the pair should be
attributed to free-fall in crude oil prices as ultra-low crude oil prices will
ensure that underlying inflation will remain subdued and far from BoE’s December
2016 target of 1.6%.
Just
like any other field, macro-economic theories are also evolving. In current scenario
Philip Curve, which shows inverse relationship b/w unemployment rate and
inflation, is under scanner. A falling unemployment rate is no longer guarantee
for spike in inflation, which has make the job of central banker trickier.
Source:
Bank of England
